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Regressive Taxes + Regressive Spending = Redistribution from Low- to High-Earners

1 min readBy: Andrew Chamberlain

Question: What happens when you combine a regressive cigarette taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. increase with an increase in government spending on programs that are disproportionately targeted at middle and upper income households?

Answer: Fiscal redistribution from low-income households to upper-income households.

Unfortunately, that’s exactly what Tennessee Gov. Phil Bredesen has proposed in his latest budget as part of his “Schools First” initiative. Here’s a sample from our new “Fiscal Fact” exploring the drawbacks of funding the broad array of spending programs with cigarette taxes that disproportionately fall on low-income Tennesseans.

As you can see from the figure, once the burden of cigarette taxes is accounted for, only the top half of Tennessee earners come out ahead from this part of the Governor’s plan, while the lowest-income households pay much more in taxes than they receive back in spending. Overall, this component of the Governor’s plan alone results in a fiscal redistribution of $2.3 million from the bottom 50 percent of Tennessee earners to the top 50 percent:

Read the full piece for more here. For background on the basic methodology of fiscal incidence, see our earlier working paper here.